The Enforcement of Indonesian Security Interests

This article will provide a brief description of the procedures whereby a creditor may pursue the enforcement of its Indonesian security interests. The Indonesian Civil Code (the "Civil Code") only recognizes two forms of security interests: mortgages and pledges. Mortgages may be created to cover either shipping vessels or land and other immoveable property (i.e. fixtures) located thereupon.

Mortgages are the only publicly registered security interest available in Indonesia. Pledges may be created to cover a variety of tangible and intangible property. An Indonesian court will generally treat an assignment, fiduciary assignment or fiduciary transfer as a pledge, although these instruments are not specifically contemplated in the Civil Code.

In addition, though not formal security interests, the irrevocable power of attorney to sell certain specified property is commonly used in Indonesia to provide the creditor with rights in the debtor's property.

General Enforcement Procedure

Court Order

For a pledge of shares, fiduciary transfer or assignment (each a "pledge instrument"), an Indonesian district court judgment and order will be subject to appeal. The enforcement proceeding could then proceed through two levels of appeal to the Supreme Court before the creditor can obtain issuance of a final and executable order to enforce the pledge instrument.

In the case of a deed of mortgage (or hak tanggungan) over land, which must be executed in notarial deed form by a Pejabat Pembuat Akte Tanah or "PPAT" (an official entitled to make land deeds), an Indonesian district court judgment and order based on a properly drafted document prepared by the PPAT in notarial deed form should be immediately enforceable and not subject to appeal.

The district court hearing on a creditor petition for enforcement and foreclosure on a deed of mortgage should be limited to the issue of default upon the underlying loan agreement.

Attachment/Seizure

Under Indonesian law, a court may order the attachment/seizure of property prior to a decision of a case on the merits in the following circumstances:

to recover specific property owned by a party but in the possession of a second party (known as penyitaan revindicatoir), and

to conserve property of a debtor which a creditor claims is being disposed of or hidden in a manner adverse to such creditor (known as penyitaan conservatoir).

An application for attachment/seizure is usually made simultaneously with the claim on the merits for a court judgment and order to recover the debt. An application for attachment/seizure based upon penyitaan conservatoir must be supported by evidence that there is a reasonable fear that the debtor will dispose of or hide its property without attachment/seizure.

The president of the court tribunal has full discretion to accept or refuse an application, and no guidance is given under the Civil Code for reaching this decision. If an order is granted, the attachment/seizure is then carried out by the jurusita (officer) appointed by the court to attach/seize the property.

An inventory of the attached property is prepared by the jurusita. A special custodian is often appointed to hold the attached property, although occasionally the debtor itself is permitted to retain possession of the property.

Enforcement

Upon the issuance of a final judgment and order from the court, the prevailing creditor must file an application for a writ of enforcement ("fiat execusi"). Upon issuance of the fiat execusi, the prevailing creditor must then separately apply to the court for possession of the secured property and commencement of the auction procedures of the State Auction Office ("SAO").

State Auction Office

For a public sale to be conducted by the SAO, the documents establishing the debt and the pledge instrument or deed of mortgage must first be presented to the SAO. The proposed terms and conditions of sale may then be prepared for the SAO by the creditor pursuant to the authorization which should be contained in the pledge or mortgage instrument.

The SAO sets an auction date, and gives public notice of such date in the newspaper. The secured party can bid up to the amount of the outstanding debt without having to pay additional cash. The official minutes of the sales proceeding constitute the title transfer document, and the purchaser need take no further steps in order to protect title to the property purchased.

Enforcement of the Pledge Instrument

Pledge of Shares

The pledge of shares, like other pledge instruments, is an accessory agreement which may only be used to secure an underlying debt obligation. Therefore, in order for a pledgee to formally enforce its rights under a pledge of shares, a notice of default must first be issued in respect of the underlying debt obligation.

A pledge of shares typically includes an irrevocable power of attorney in favor of the pledgee, authorizing the pledgee to sell the pledged shares by a private sale upon default. The power of attorney is included in the pledge of shares to avoid the Civil Code requirement of sale by public auction.

Under certain cases specified in the Civil Code, pledged shares that are listed on a stock exchange can be sold by a registered broker, property subject to a pledge instrument could be sold at a private sale by prior court order subject to judicial review of the sales price, or the property may be retained by the creditor in a court-ordered exchange for cancellation of all or part of the secured debt. It has been frequently advised that pledged shares may be sold privately without a prior court order pursuant to a contractual power of attorney. This advice should, however, be reconfirmed with on a case-by-case basis.

The buyer of the pledged shares purchased in a public or private sale must be a "qualified buyer", that is, a person or entity that is entitled by Indonesian law to hold the shares in the relevant company.

For example, if the relevant company is a foreign investment (PMA) company, it is usually necessary to obtain the prior approval of the proposed buyer from the Indonesian Investment Coordinating Board (BKPM) for a transfer of shares.

Since no filing or recording systems are available in Indonesia for pledge instruments, there is no official manner in which a third party can determine whether a creditor has a pledge instrument covering a particular property.

The Civil Code will protect a bona fide purchaser of secured property (i.e. a person who pays good value for secured property without prior knowledge of the creditor's security interest) and after such a sale the security interest will no longer attach to the property in the possession of such bona fide purchasers.

Fiduciary Transfer

A fiduciary transfer of proprietary rights for security purposes is the Indonesian security instrument usually used to confer a security interest over the debtor's tangible moveable property. In Indonesian law and practice, a fiduciary transfer is generally recognized as a form of pledge.

Under a fiduciary transfer, the "ownership" of certain described moveable assets is transferred to the creditor for security purposes, although normally the debtor retains the right of possession and use of the assets. In order to identify the tangible property covered, the fiduciary transfer usually attaches a list and description of the covered property, and provides for the delivery of periodic updates from the debtor.

Upon an event of default, the creditor is usually entitled under the terms of the fiduciary transfer to take possession of the property, sell it, and then apply the proceeds of the sale against the secured debt.

It is generally advised that moveable assets subject to a fiduciary transfer may be sold privately under the terms of the agreement. If, however, possession is not voluntarily surrendered by the debtor after notice of an event of default, then the creditor must seek court intervention, including attachment/seizure based upon penyitaan revindicatoir, in order to obtain possession of the property in question.

Although both foreign and Indonesian parties are generally entitled to purchase property of the type which is normally secured by a fiduciary transfer, there are certain tax considerations which may arise with respect to such a purchase. In particular, certain moveable assets are that imported into Indonesia through a PMA company obtain an exemption from customs duties and import taxes, and such taxes must be paid upon a sale of the assets unless the exemption is extended to the buyer.

Assignments and Fiduciary Assignments

An assignment is also generally recognized in Indonesian law and practice as a form of pledge. An assignment is generally distinguished from a fiduciary assignment by the fact that the latter instrument allows the right of possession of the secured property to remain with the debtor.

An important consideration in the enforcement of an assignment is the fact that intangible property which is subject to the assignment is under the control of a third party obligor. Where the cooperation of the debtor is required (and not forthcoming) for the creditor to obtain access to the property, it will then be necessary for the creditor to follow the enforcement procedure described above, including obtaining an order of attachment/seizure.

Enforcement of the Deed of Mortgage and Power of Attorney

Deed of Mortgage

The deed of mortgage is an Indonesian mortgage instrument that is made by the debtor in favor of the creditor to grant the creditor a security interest in the debtor's immoveable property. The deed of mortgage over immoveable property (together with the Indonesian ship mortgage) is the only Indonesian security instrument which can be recorded in an established public registry.

Unfortunately, the costs involved in obtaining a registered deed of mortgage are relatively high, generally up to 1 percent of the amount secured by the mortgage, and include PPAT fees for preparation of the notarial deed, as well as other fees incurred in connection with the recordation and registration of the deed of mortgage at the local land office.

Due to these often substantial costs, and the potential delays in mortgage registration at a variety of local land offices, Indonesian borrowers commonly seek to negotiate credit agreements which do not require a registered mortgage, or a registered mortgage covering less than the full amount of the credit as security.

Some lenders have also accepted the irrevocable power of attorney to register a mortgage or a power of attorney to sell land (discussed below) in addition to or in lieu of a registered mortgage.

Under the Civil Code, enforcement of a deed of mortgage must generally be carried out through an Indonesian district court by a motion to foreclose and a court-supervised public auction conducted by the SAO.

Although the Civil Code provides that a first rank mortgage holder may in the text of the mortgage be given an irrevocable power of attorney to sell the mortgaged property by public auction upon a default without first petitioning for a court order, we are aware of Indonesian court decisions which have rejected this statutory right and required that a first rank mortgage holder nonetheless must first petition the district court before selling the mortgaged property. The buyer of a mortgaged property must be also entitled under Indonesian law to take possession of the title to the mortgaged property.

Foreign buyers may legally only take possession of certain limited classes of real property title, usually hak guna bangunan or "right to build" title for landed property. In addition, where the deed of mortgage covers both land and a factory, a buyer seeking to operate the factory must be allowed by Indonesian law and public policy to obtain the government licenses or permits necessary to own and operate the site.

Power of Attorney to Register Mortgage

The power of attorney to register a mortgage does not afford the same protections and procedural benefits as a registered mortgage for five principal reasons:

it must be notarized by a PPAT and is limited to a one or three month period of effectiveness

it does not constitute a perfected security interest over the property covered until the holder of the power establishes and registers the mortgage

upon exercise there is usually a delay before the mortgage is registered by the Indonesian authorities and a perfected security interest exists over the property

it may be difficult for a distressed debtor to pay PPAT notarial fees, land registration and recordation costs unless these fees were deposited in escrow in advance by the debtor and

in the event of a debtor bankruptcy the mortgage might be treated as a voidable preference or fraudulent transfer under Indonesian bankruptcy law.

Power of Attorney to Sell

A power of attorney to sell may, under its terms, authorize a private sale of real property upon an event of default. Notwithstanding any private sale provisions, however, if the power of attorney to sell is presented at an Indonesian land office, the land office might nonetheless insist either that

the registered owner listed on the title document must execute the land transfer deed or

the power of attorney should first be enforced by an Indonesian court.

If the power of attorney to sell is presented to an Indonesian court, the court might still require a sale by public auction, especially if real property is involved.

Security Interests in a Bankruptcy

The Indonesian Bankruptcy Code, as amended in 1998, may have a strong negative effect on the rights of secured creditors. Secured creditors could be barred from enforcing their security rights for a period of up to 270 days if the debtor obtains a debt moratorium, and 90 days if the debtor is declared bankrupt.

During a bankruptcy, the receiver may be entitled to sell secured property in the ordinary course of the business proved that "adequate protection" is made for the secured creditors. Secured creditors also may not be entitled to preserve their security interests if they wish to vote in respect of a debtor's compromise plan. If no compromise plan is adopted, the secured creditor is given only 2 months to enforce its security interest.